Abstract

http://ssrn.com/abstract=1668706
 
 

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How Wise Are Crowds? Insights from Retail Orders and Stock Returns


Eric K. Kelley


University of Tennessee; University of Arizona

Paul C. Tetlock


Columbia Business School - Finance and Economics

January 2012

Journal of Finance, Forthcoming

Abstract:     
We analyze the role of retail investors in stock pricing using a database uniquely suited for this purpose. The data allow us to address selection bias concerns and to separately examine aggressive (market) and passive (limit) orders. Both aggressive and passive net buying positively predict firms' monthly stock returns with no evidence of return reversal. Only aggressive orders correctly predict firm news, including earnings surprises, suggesting they convey novel cash flow information. Only passive net buying follows negative returns, consistent with traders providing liquidity and benefitting from the reversal of transitory price movements. These actions contribute to market efficiency.

Number of Pages in PDF File: 85

Keywords: market efficiency, retail investor behavior, return predictability, liquidity provision, financial news, private information

JEL Classification: G14

Accepted Paper Series


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Date posted: August 31, 2010 ; Last revised: January 24, 2012

Suggested Citation

Kelley, Eric K. and Tetlock, Paul C., How Wise Are Crowds? Insights from Retail Orders and Stock Returns (January 2012). Journal of Finance, Forthcoming. Available at SSRN: http://ssrn.com/abstract=1668706 or http://dx.doi.org/10.2139/ssrn.1668706

Contact Information

Eric K. Kelley
University of Tennessee ( email )
Knoxville, TN 37996
United States
University of Arizona ( email )
McClelland Hall
P.O. Box 210108
Tucson, AZ 85721-0108
United States
520-621-5589 (Phone)
Paul C. Tetlock (Contact Author)
Columbia Business School - Finance and Economics ( email )
3022 Broadway
New York, NY 10027
United States
212-854-9895 (Fax)
HOME PAGE: http://www0.gsb.columbia.edu/faculty/ptetlock/

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